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ACTEC Trust & Estate Talk
Estate & Gift Tax and Charitable Contributions Under the OBBBA
00:19:23
ACTEC Fellows Stephanie B. Casteel and Beth Shapiro Kaufman
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Estate and gift tax and charitable contributions under the One Big Beautiful Bill act that's the subject of today's ACTECH Trust and Estate Talk.
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Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. The this series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now, our ACTEC Fellow host with today's topic.
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This is ACTECH Fellow Natalie Perry of Chicago, Illinois. Signed into law on July 4, 2025, the one big Beautiful Bill act marks the most significant overhaul of federal tax legislation since 2017, impacting taxes, credits and deductions across the board. In a recent ACTECH Ali CLE webinar, a panel of expert ACTEC Fellows offered valuable insights for estate planners navigating this complex new landscape. ACTEC Trust and Estate Talk is pleased to present highlights from that discussion in this special series of podcasts. In this podcast, we'll hear an overview about the bill from ACT tech fellow Beth Shapiro Kaufman of Washington, D.C. followed by impacts to Charitable Contribution Deductions by Stevie Castile of Las Vegas, Nevada. Welcome, Beth.
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Estate planners have spent the last seven years worrying about and planning for a potential sunset of the doubled estate gift and generation skipping tax exemption that's been in effect since 2018. The new tax bill signed into law on July 4, 2025, eliminates that issue. Instead, the exemption will rise to $15 million per person, effective January 1, 2026. Today, I'll talk about some of the nuances in this legislative process and how we got here. It's a little more complicated than Schoolhouse Rock made it out to be. The first question with this bill is whether it was going to be a regular tax bill or whether it was going to be a budget reconciliation act. That issue is important because it changes the procedure, particularly as a bill goes through the Senate. We were fortunately in a situation where a Budget reconciliation act was possible. Now there's only one Budget Reconciliation act per fiscal year, and the fiscal year runs from October 1st until September 30th. But Congress hadn't passed a Budget Reconciliation act for the fiscal year ending September 30, 2025. So we had the possibility of this being the Budget Reconciliation act for fiscal year 2025. Otherwise we would have just been stuck with a regular bill. The reason it makes a difference is because on the Senate side, a regular bill is subject to filibuster. And if a filibuster gets started, it takes a 60 vote. Vote in order to overcome a filibuster. However, budget reconciliation acts are not subject to filibuster. They can pass with a simple majority. The trade off is that budget reconciliation acts are subject to something called the Byrd rule. And this has nothing to do with beasts with flapping wings. This is Senator Robert Byrd, who was a longtime Senate member from West Virginia. So the way the Byrd rule works is that any senator can call a point of order as to an extraneous matter in the bill. An extraneous matter for this purpose is one that has no impact on outlays or revenues, that increases revenue for a fiscal year beyond the budget window covered by the reconciliation measure, or that recommends changes in Social Security. So if a Senator raises a point of order about some item in a reconciliation bill on one of these bases, then the question goes to the parliamentarian. And the parliamentarian in the Senate is a particular individual. It's currently Elizabeth McDonough. She's been the parliamentarian since 2012, and she's been in the parliamentarian's office since 1999. So this is not a political appointment. This is just a person who's the arbiter of whether the rules are being followed. If she says that something is actually an extraneous matter, then either it gets stricken from the bill or that provision has to get modified so that it's not an extraneous matter, or the point of order can be overcome by. By a 60 vote majority. But margins in the Senate right now are too thin to count on 60 votes for anything. What we saw as the Senate considered this bill is that a number of provisions were the subject of a point of order. The parliamentarian ruled on each of them as she is supposed to, and that process went surprisingly well under the circumstances. Just kind of as an aside, one of the provisions that was stricken under the Byrd rule was the short name of the bill. So there had been a line in the bill that said, this bill shall be known as the one big beautiful Bill Act. And that, of course, has no impact on outlays or revenues. And so someone challenged it, and the parliamentarian struck it. So, officially, this bill doesn't have a name, which is why a bunch of us have decided to call it OB3. All right, so once the decision was made to have this be a budget reconciliation bill, then we're following the rules that apply for budget reconciliation bills. And the first thing that you need is a budget framework. Once you have a budget framework, then you can go on to see what fits in that budget. So A budget framework is an agreement as to how much money you're going to spend. In other words, how much revenue loss are you going to put up with from this bill? And after a fair amount of back and forth, the House and the Senate decided that they were going to spend $4.5 trillion. That's trillion with a T, $4.5 trillion over 10 years. 10 years is the budget window. And they were going to require $2 trillion in spending cuts over that same period. Now, Simply extending the TCJA provisions was estimated to cost $4.6 trillion. And then on top of that, there were a bunch of other campaign promises that had been made, like no tax on tips, no tax on overtime, no tax on Social Security. So clearly, it was time to get creative. All right, we have to talk about something that we call scoring. Scoring is a determination of how much revenue would be lost during the revenue window. And the window here is 10 years. And you measure the cost of legislation by comparing how much revenue is going to be coming in if you pass the legislation with how much money would come in if you didn't pass the legislation. And at least that's the way it's always been done. And we call that measure of how much revenue would come in without the legislation the baseline. So we compare revenues under the bill with the baseline. Well, this year in Congress, they said, well, the baseline could be current law, which is what the law would be if the bill didn't pass. Or it could be current policy. Current policy included the TCGA provisions, including, for example, the doubled estate and gift and GST exemption. If you treat the TCJA provisions as being in the baseline, then when you extend the TCJA provisions and make them permanent, they cost nothing. Okay, so this is the way I like to analogize that. Say that we're going to the grocery store. And when I went to the grocery store last week, I bought milk and ice cream, among other items. And this week, I again have milk and ice cream in my cart, and I go through the checkout and I put all my items on the conveyor belt. And when the cashier rings up the milk and ice cream, she says, oh, you don't have to pay for those because you bought them last week. That's what this is like. Okay, we don't have to pay for the TCGA provisions because we enacted them in 2018, but they were supposed to expire at the end of 2025. Well, that's okay because it's current policy. So that's how Congress got around paying for the TCJA provisions. And let me just make it clear. When Congress passed the TCJA provisions in 2018, they didn't make them temporary because they didn't really love them. They made them temporary because they were trying to adhere to the budget rules and they didn't have the revenues to offset making them permanent. If you use current policy as your baseline, then you could, for example, if you were Congress, pass a law and put it in effect for one year and it's very expensive, but it's only one year. Then the following year while it's in effect, Congress could come back and say, we're going to make that law permanent and claim that because current policy includes that one year law, they don't have to offset the revenue loss from the next year forward into the future. You can draw your own conclusions about what that does to the federal budget. But as you know, The House passed OB3 in late May of 2025. It is a budget reconciliation bill. It does use current policy as its baseline, and therefore they were able to include a lot of new tax cuts under the budget framework because they didn't have to include the cost of extending the TCJA provisions. The bill passed 215 to 214, and then the action turned to the Senate side. After making various changes to the House bill and some touch and go meetings with fiscal conservatives who were concerned about the impact on revenues and deficits, The Senate voted 51 to 50 to pass the bill on July 1, 2025, with Vice President Vance casting the deciding vote. Now, normally the next step would be to create a conference committee and there would be a conference between Senators and members of the House. They would negotiate between the provisions in the two bills, come up with a compromise, and then it would get voted on again in the Senate and the House. But Donald Trump had asked for this bill to be on his desk for July 4th. So they didn't have very much time and they reached an agreement with a little bit of arm twisting. I think that the House would just vote on the Senate bill as it was. And so they did. The bill passed the House that gave us the exact same bill passed by both chambers. And then it went to the President and he did sign it on July 4th. The final bill cuts taxes by 4.5 trillion over a decade, using a current policy baseline and cuts spending by $1.7 trillion. So just a quick overview of the estate and gift provisions in this bill. As I said when I started, there is really just one provision. It's an increase in the exemption to $15 million per person effective January 1, 2026. That exemption level will then be indexed going Forward starting in 2027. And it's permanent. As we say now, permanent means it's the law until Congress changes the law. So we don't any longer have an expiration date looming. But it's still possible that at some point some other Congress composed of different people will come back and make changes. So we still need to be vigilant in planning. There are a lot of other provisions in this tax bill. We're going to have a series of podcasts on these subjects and other ACTEC fellows will be speaking and summarizing the provisions on the non estate, gift and generation skipping tax provisions, many of which are very relevant to our practices and our clients.
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Beth, thank you so much. That was incredibly informative and very entertaining. We appreciate you giving us the summary of OB3. OB3 makes four changes to an individual's ability to deduct charitable contributions from their income tax actech fellow Stevie Castile of Las Vegas, Nevada joins us now to explain to estate planners and wealth management professionals what they need to understand. Welcome Stevie.
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Thank you, Natalie. The Tax Cuts and Jobs act had suspended miscellaneous itemized deductions and they were set to return in 2026. The act made that suspension permanent. The act also repealed Section E of code section 68 such that non itemized deductions of estates and trusts are now subject to a reduction of 2:37 of the lesser of itemized deductions otherwise allowed, excluding miscellaneous deductions which are disallowed or the amount of taxable income to which the 37% bracket applies. The charitable deduction under section 642 is such a a non miscellaneous deduction. So the Section 642 charitable deduction is now subject to the 237th haircut. This means that a trust or estate entirely payable to charity will now owe income tax. Let's look at an example. Let's say you have a non Grantor Trust with $370,000 of taxable income in excess of the run up in brackets, all payable to charity. The 237th haircut would disallow a deduction of $20,000. So not only will the trust owe income tax, the dollars used to pay the tax will reduce what is going to the charity resulting in more income tax due, requiring more charitable dollars otherwise going to charity to pay the income tax. And you end up in a circular algebraic computation that makes the result even worse. The act also made some changes to the charitable income tax deduction for itemizers and non itemizers effective in 2026. Taxpayers who itemize their deductions will be allowed to deduct their charitable contributions only to the extent they exceed 0.5% of adjusted gross income. So for example, if Jill's AGI is $1 million and she gives $100,000 to charity, the first $5,000 will not be deductible. Also, the benefits of itemized charitable deductions are capped at 35% even for those in the 37% marginal tax bracket. So for example, high income filers donating $1,000 would receive a $350 tax benefit instead of the current $370 tax benefit. Now there is some good news. The act made permanent the ability for taxpayer to deduct cash contributions to public charities up to 60% of his or her AGI. That provision had been said to expire at the end of 2025. Well, in light of these new rules, what planning can itemizers do before 2026? The 0.5% floor and limitation of the charitable deduction to the 35% marginal rates are not effective for 2025. So if a larger charitable gift is contemplated, an itemizer taxpayer should consider making it before the end of the year. Funding a DAF or adding to a DAF in 2025 is a great idea. And of course after 2025, itemizers should make gifts in years in which they have lower AGI in order to depress the 0.5% floor. The charitable income tax deduction for non itemizers is better under the actual since the Tax Cut and Jobs act increased the standard deduction, only about 10% of households have itemized deductions making them ineligible for charitable income tax deductions. Effective in 2026. Taxpayers who claim the standard deduction are now able to deduct cash contributions to public charities other than DAFs or supporting organizations up to $1,000 for an individual and $2,000 for married persons filing jointly. So for non itemizers they should bunch charitable giving in one year so they get the higher deduction. And again, funding a DAF with a single one time contribution is a way to bunch charitable contributions in one year and non itemizers should make gifts after 2025 when this law is in effect. Finally, the act also imposes a new excise tax on college and universities on their university endowment and investment earnings. The rates range from 1.4% to 8% and the highest rate applies to institutions with above $2 million in endowment assets per student. Note that the definition of net investment income is different and contrary to the IRS regulations, private colleges with fewer than 3,000 tuition paying students are exempt from the tax. So only about 56 colleges and universities are currently subject to this tax, but this number is expected to increase. There was a proposal to increase the section 4940 excise tax on private foundations from 1.39% to 10%, but this proposal did not make it into the final bill.
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Thank you, Stevie. Join us next week when we hear about changes to qualified opportunity zones.
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Thank you for listening to this episode. Welcome to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.